OK, so after reading this post, you’ll see why I’m not a huge fan of life insurance. I am not an expert in the field by any means, however, this is solely a reflection of my direct experience with it.
Working 13 years as a licensed investment adviser and insurance agent, there was an acronym that was commonly used: YTB; standing for Yield-To-Broker. In this case, the stockbroker. The focus on Yield-To-Broker lives today, and is the #1 reason life insurance can be a massive ripoff.
I hope I don’t make any enemies in the life insurance world for this, but here’s the Million Dollar Round-table requirements for membership. You’ll see it’s mostly about the commissions that agents make. That’s why they tend to drive nice cars, live in fancy houses, and win big vacation trips and cruises. But to be fair to this elite group, selling life insurance is really hard work. So in a way they do earn it, but hopefully not by selling you inflated-commission policies that are good for them and not for you.
I know a little bit about insurance – maybe even enough to be dangerous – however, I am not a licensed agent and needed to shop for a new policy. The backstory here is that I used to actually be a licensed agent and financial planner but sold my financial planning business in 2000. In 2003 I left the financial planning industry and vowed never again to sell directly another investment, insurance policy or deal with OPM (aka – other people’s money). My biggest fear back then, and now, is making any recommendation that would do a person harm by losing them money.
Since the old days when I worked as a licensed financial adviser and planner, I’ve always conducted fee-based business consulting and coaching. I work with a wide variety of CEO’s and business owners; including a few financial, real estate, and mortgage professionals, but I don’t sell life insurance or investments.
Recently, my wife and I sought out a new life insurance policy, as we had been paying for term insurance for many years and wanted to re-evaluate our financial planning, increase our savings rate, and also take more caution as we stare the retirement chapter of our lives directly in the face.
Shortly after beginning our insurance shopping, we discovered a young man who specializes in life insurance. His name is Eric Elam and he works for a company called CalChoice Financial in Scottsdale. The CEO of CalChoice happens to be a business coaching client of mine, coincidentally, and we scheduled a meeting with him. When my wife and I first met Eric, we warned him that we could easily become his worst nightmare as clients due to my recent past as a successful financial adviser and planner. I also discussed with him the one topic that I was unfamiliar with – life insurance. We needed it and wanted to get the best deal possible that was right for us.
Like I used to be, most financial planners and advisers focused on what we called, “asset gathering”. The asset-gathering adviser or planner lives on the investment side of the financial planning world, and almost everything they do is built on finding clients who have the most, “invest-able assets.” That’s because a financial adviser who manages other people’s money (assets) does pretty much the same work for someone with $10,000 as they do for $1,000,000. They also get paid fees based on assets under management. The financial adviser that gathers assets generates more income on fees from wealthier clients – ten times more for the latter, than the former. That’s why most decent, confident, experienced planners will tell you they have a minimum account size – you got it, YTB.
Now, based on my direct experience as a consumer and former agent, here are some points that I would like to make:
- Commissions paid to life insurance agents are one of the biggest costs when purchasing term or permanent life insurance. Agents make a big, fat commission when they sell a policy and this is how they feed their family. Chances are we don’t ever see what that commission is for a reason alone.
- Don’t believe that term is the end-all-be-all when it comes to life insurance. Sure, tons of experts want us to believe that term is the way to go. However, there are many practical applications for permanent life insurance, including whole life, indexed universal life, and other types of insurance against premature death as well. Just make sure that the insurance you’re sold is right for you – which means you have to work with someone you trust.
- I hate buying life insurance, just like most people do. No one wants to buy it, but if we don’t and die prematurely, our loved ones are most of the time left hanging; unless we have sufficient assets to replace our income, funeral costs, etc…
- Term life insurance can be expensive because the insurance company knows that most of us won’t die prematurely. That’s right. When we buy life insurance we’re making a bet with the insurance company. We’re betting that we may die young. The life insurance company that underwrites us is betting that we won’t. From a geeky, actuarial point of view we most likely won’t die prematurely. Guess why the life insurance companies have so much money, big buildings, and fat cat executives with massive compensation packages? The answer is that they “bet” better than we do.
- Permanent insurance is expensive. If we don’t die, and we buy the right policy, and the cash value of the plan grows over time and we can use that money for whatever we want. The insurance company may get to the collect the premium and we pay for the cost of insurance, but the way I look at it is that if we live, and build cash value, we can tap into it by borrowing it – transferring the risk of premature death early. The insurance company then wins by collecting a fair cost of the life insurance purchased and we both win. That’s a good thing, right?
- Life insurance is extremely confusing. Even though I was a licensed life insurance agent, it still can be an extremely confusing subject to wrap my mind around. When I was in the business, I always worked with a life insurance specialist who would meet with me and my client to run and present illustrations and answer the 432 questions we had, then selling the policy. The insurance guru would get paid and I would get paid. The client would get their life insurance. We’d all be happy.
- Very few life insurance agents disclose what they get paid in commission. I didn’t either. That’s because most life insurance agents don’t want the client to know how much they get paid in commission – for a reason! Life insurance commissions can be massive and are the primary reason life insurance can be a massive ripoff if you don’t compare what different agents get paid – especially if they don’t or won’t disclose this.
- Term insurance is sold, just like permanent insurance, with varying commissions paid to the agent and broker, also known as the General Agent. Do your homework on term and permanent life insurance and ask your agent to reveal how much they get paid. Better yet, ask them to show you illustrations with a reduced commission structure, and if they don’t throw you out of their office first, you might save some money on one of the most costly services we will ever pay for.
- Don’t expect to know what a really good insurance agent knows. I don’t and chances are, you can’t, unless you invest many hours to do your homework. This is why finding someone to trust to do the right thing for you is paramount.
The bottom line is that most of us need life insurance for many years. The truth is also that most of us won’t die young unless we live on junk food and sugary fast food drinks, or smoke our way into an early grave. There are many practical applications for life insurance beyond replacing income, paying off debts, etc. No decent person wants their family to get screwed if they die prematurely. Also, it’s important to know why the rich use life insurance for many good reasons; like setting up their own private banking system, protecting assets, funding their estates, charitable giving and more. If you’re rich or pay big tax bills, chances are you know this already.
The grim reality is that most of us aren’t rich. We’re mere mortals who have a budget. When we need the right kind of life insurance, it needs to be affordable. Otherwise it goes away if and when we can’t or won’t make the premium payments, and this is not good.
In the end of it all, what I do know is that I hate buying life insurance, but I need it and I found a great guy that I can actually trust. When Eric walks me through the many options to meld term with permanent insurance, my head swims. I actually feel myself getting annoyed. Part of this is because I hate spending money on life insurance. The other part of me hates not knowing what I would love to know. At least I know what Eric is getting paid, and that’s why I trust him to sell me and my amazing wife life insurance.
In closing, the company Eric works for pays me as a consultant. I do get paid as a consultant, but not to sell life insurance. The reason I wrote this article is to help other people ease the pain of buying life insurance, and knowing the biggest cost of life insurance is typically the commission the agent gets, the YTB. But at least if I die younger than expected, I will have done the right thing for my family and is another reason why I can sleep well at night.
P.S. Here’s a solid article by Nerd Wallet regarding the commission costs for life policies.